budget

It is difficult to write a financial blog when the death count from Corvid -19 keeps going up every day. However, the big question is when we will get back to normal? I think you have to look back in history at the Spanish flu of 1918 for some clues.

Policies used to reduce the spread of Corvid -19 are similar to what was done to reduce the spread of the Spanish flu. Unfortunately, isolation, quarantine of infected people, use of disinfectants and limitations of public gatherings were applied unevenly. (Sounds familiar?) Back then, the Spanish flu came in waves and infected 500 million people, about a third of the world’s population. It lasted from Jan 2018 until Dec 1920 and somewhere around 50 million people died.

I fear that world leaders are more worried about keeping their jobs then doing their jobs. Their slow reaction of issuing stay at home orders for non-essential workers will prolong the spread of the Corvid-19. In my humble opinion, a V-shape recovery is overly optimistic.

The roll out of government programs to get money into the hands of individuals, small business and bailouts of large corporation will take a long time to be effective.

Many government websites are crashing from the number of requests for aid.

Many small businesses will go bankrupt before the relief funds arrive.

The aid to businesses are in the form of loans which add extra operating costs, this will hider rehiring employees.

The United States had 16.5 million unemployment applications over the past three weeks which is just a small sampling of what is to come.

This is a world recession so leisure and travel will be impacted for a long time. Plus business travel, conventions and hotel stays will be limited.

The best case scenario would be a slow and cautious U shape economic recovery. What is needed is accurate testing of people who would be allowed to go back to work. Also, a quick development of a vaccine and an effective treatment for people who are infected with the virus.

The worse case scenario would be an L or W shape economic recovery. Rushing to reopen the whole economy could cause a second wave of the Covid-19 outbreak, killing thousands of more people and shutting down businesses all over again.

I am not investing based on stock market experts who tend to be overly optimistic. I am listening to the doctors who specialize on disease control. Their timeline of a vaccine is 12 to 18 months away. Therefore this recession will probably last around 18 to 24 months. The chart below illustrates that happen to the S&P 500 during the last recession of 2008-09:

This chart illustrates the past two years of the S&P:

I am not an expert on charts but I think that there is a good chance that what we are seeing is a bear market rally. There is more bad news coming that hasn’t been priced into stock prices. I would suggest that you play it safe and sell into stock market rallies and hold on to your cash.

Around this time last year, a U.S. government shutdown forced many government workers to go into debt to pay bills and some even had to go to food banks to make ends meet. They eventually got back pay but it is a good example of why you need an emergency fund. According to a recent survey from Charles Schwab, 59% of Americans say that they are living paycheck to paycheck, despite the fact that the U.S. economy has experienced the longest expansion period in its history.

I have no idea when the good times will end. However, financial experts recommend having an emergency fund in case you lose your job. The financial rule of thumb is to cover 3 months of living expenses if you qualify for unemployment insurance and 6 months if you are self-employed. I am a bit surprised that they also recommend the need to have funds available for unexpected car or appliance repairs. People who own homes or cars should include such repairs in their annual budgets.

I would recommend making two budgets, one for when you have a job and an emergency budget for when you lose your job. Divide your budget into needs, wants and savings. Needs are expenses you can’t avoid, like mortgage, rent, car loans, food etc. Wants are things you could do without if necessary, like clothes and entertainment. Saving for retirement, college or extra debt payments should also be excluded from your emergency budget.

Once you calculate your absolute bare bones budget, you can start to put money aside every month into an emergency saving account. With tax season just around the corner, you could jump start your savings but including any expected tax refund.

Tips for people living paycheck to paycheck or for those that can’t save fast enough

Apply for a secured line of credit if you own your own home

Don’t own a home, then apply for an unsecured line of credit

Use a line of credit to pay off your credit card balances and put the interest savings into an emergency savings account.

Going into debt is not a great option but it is better than losing your home or having to sell your car.

Do you know the fable of the ant and the grasshopper? In essence, the ant spends all summer gathering food for the winter while the grasshopper sings and fiddles the summer away. When winter comes the Grasshopper has no food and found itself dying of hunger, while it saw the ants distributing corn and grain from the stores they had collected during the summer.

Nearly 70% of Americans are making a money-related New Year’s resolutions and more than half of those making one are prioritizing saving more, according to Fidelity Investments’ 2020 New Year Financial Resolutions study.

As well-meaning as we may be, around half of us failed to keep the financial resolutions we made this year. Change doesn’t come about because people want change so badly. It comes about because they plan it.

Here’s how to make a plan so you can actually accomplish three of the most popular financial resolutions for 2020.

“Save more money”

This goal won’t work for many people, because it needs to be more clearly defined.

• Make the goal as specific as possible: “Save $3,000 over 12 months,” not just “save more money.”
• The goal needs to make sense and be attainable with your skills and abilities.
• The goal should be important to you.
• You need to set a time frame for accomplishing your goal.
• The progress of your goal has to be tractable

Pay down debt

One method is call the snow ball strategy. You make at least the minimum payments on each of your debts, credit card, student loans, etc. and then put any extra money you have toward the debt with the smallest balance, regardless of interest rate or other considerations, so that you pay it off more quickly and have one fewer bill to worry about.

This method has a psychological benefit: Paying off one debt will keep you motivated to then aggressively pay off your next-highest balance and so on.

I prefer the avalanche method, where you focus on paying off the debt with the highest interest rate first. Mathematically, this method is more financially beneficial than the snowball method, because you’ll save more on interest payments. But you might lose steam if you’re not seeing quick results.

Spend Less

This resolution is probably the hardest to actually achieve because it involves making a budget so that you know how much you typically spend each month in major categories: housing, food, transportation, clothing, entertainment, etc.

Changing your spending habits can be difficult because you are pressured to spend from many different social media platforms. Seeing your family and friends post pictures of their vacations, drinking at their favorite pub or dining out with a group of friends are difficult to ignore.

I believe that in order to succeed you need to reduce but not completely eliminate your spending on things you enjoy. Step one is to breakdown areas that you spend too much money on, then make up some spending rules.

For example:

One common area of over spending may be going out for lunch every day. New Rule: Bring a lunch to work three days a week and only go out twice a week.

Another common area of over spending maybe ordering takeout meals. New Rule: Assign every other Friday for ordering a takeout meal.

Another concrete tactic for spending less: Institute “no spend” rules for yourself. If there are certain things you spend too much money on like books, clothes or entertainment, then set strict rules for yourself for a manageable amount of time, say a month or season. (i.e. no new purchases of summer clothes)

It takes a lot of will power and discipline to be successful in keeping any of these three financial resolutions. However, paying down debt and spending less will automatically lead to saving more. To be really successful, you want to make sure your goals are attainable, but also that they make sense with the life you want to lead.

Being a retired senior, reducing income taxes is key when living on a fixed income. I usually joke with my friends that I fix my own income each year. I do my best to minimize my quarterly installment payments to the tax department.

With holiday season coming soon, you are going to be busy visiting with family & friends and Christmas shopping. You will be glad during tax filing season that you planned ahead! You could reduce your tax bill or generate a bigger tax refund.

Tip 1 – Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Do you need new eyeglasses or hearing aids then buy them now. Planning a winter vacation that requires medical shots, get them ahead of time.

Tip 2 – Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and the full amount is tax-deductible creating a bigger tax deduction.

Tip 3 – Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax-deductible retirement account could generate a bigger tax saving. (Plus stock market returns have been known to be higher from November to April) If you are retired and your income is lower than last year, consider withdrawing a little extra from your retirement account and put it into a tax-free account.

Tip 4 – Have you sold any investments in 2019 that will generate a taxable capital gain? Do some tax loss selling of investments that are underwater to offset the capital gains? In Canada, a capital gain loss can be carried back three taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5 – Postpone selling your investment winners in non-registered accounts until January to avoid paying tax in April. If you have losses, consider selling some winners and buy them back again to increase your cost base.

Tip 6 – Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket. For example, in Canada you can contribute to your spouses’ retirement fund and claim the deduction.

Tip 7 – Top up education savings plans for your children or grandchildren to ensure your plan gets any eligible government grants. (Canadian grants stop the year in which the child turns 18)

Tip 8 – Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 9 – Check to see if there are any changes to tax laws that could affect your tax return for 2019 & 2020. There could be some new tax deductions or some deductions that could be eliminated.

Tip 10 – Small business owners should go over their account receivables and make a list of potential bad debts. Consider writing off any bad debts that are more than 120 days overdue before tax season ends.

The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

You would think that a former financial planner could put together an accurate budget. Unfortunately, the best-laid plans of mice and men often go awry. (This saying is in “To a Mouse” by Robert Burns)

No matter how careful I am in planning a budget, something may still go wrong. My central air conditioner failed last year even though it wasn’t that old. Plus, I didn’t realize that the life cycle of my stand up freezer is only 10 years and that hearing aids need to be replaced every 4 to 5 years. Replacing all these items was not in my budget and very expensive.

However, my emergency fund did cover other unexpected break downs like having to replace my old treadmill, workout television and to buy a new refrigerator. Needless to say, 2018 was a year of unforeseen expenses.

Projecting my retirement income for 2018 also missed it mark. Some of my Canadian dividend stocks cut their dividends which not only reduced their payouts but caused their share value to drop.

I offset some of my lost income by doing some tax loss selling which will generate an income tax refund in 2019. Plus my new hearing aids are tax-deductible which makes their purchase a little less painful.

Some tips to avoid budget failure

Don’t guess, there are plenty of ways to track your spending. (Internet banking, credit card statements, mobile apps just to name a few.

Don’t forget to include birthday, weddings and Christmas gifts in your budget. You can rack up credit card debt by unplanned gift giving, especially during the holidays.

Have a realistic emergency fund. Too many people live paycheck to paycheck. For example; the U.S. government shutdown is not only hurting government employees but contract workers who won’t get any back pay. One solution if you have trouble saving is a low-interest personal line of credit which is better than using your credit card for emergencies.

Your budget should be flexible, it isn’t written in stone. It isn’t something to keep you from spending money. A budget is a tool to provide you with information to manage your finances. It can help find money that you can spend where it will give you the most enjoyment.

Think of a budget as a money road map. Sometimes you will come across bad weather, road closures and construction detours. Don’t give up if your budget doesn’t work out the way you planned.

It’s always a shame when you work hard and don’t get any benefit from the money that you have earned. Get in the habit of making a budget every year. Life is too short to live paycheck to paycheck.

I believe that the former head of the Federal Reserve, Janet Yellen, is partly responsible for rapid raising U.S. interest rates. Although, GDP growth wasn’t overheating during her term, she could have started to unwind the Fed’s balance sheet which had 4 trillion dollars’ worth of treasuries. Instead she bought more treasuries after they matured and expanded the balance sheet by buying more treasuries with the interest earned.

This kept long term interest rate extremely low and allowed corporations to borrow money at low rates to buy back their shares. The Fed’s lack of action has help fuel the longest bull market in history.

Sorry Trump supporters but your man is also to blame. His policies are inflationary!

The trump’s administration decision to pull out of the Iran deal has cause oil prices to rise. One million barrels of oil a day is being taken off the market.

Trump’s tariff war with China and other trading partners will force corporations to increase prices because their costs are going up. Costs could go up even higher if Trump increases tariffs on imports from China from 10% to 25% in January 2019

The corporate tax cuts and government spending has juiced the economy causing unemployment to fall to the lowest level in nearly fifty years sparking fears of raising wage growth.

The Trump’s administration spin that the tax cuts will pay for themselves is simply not true. Both the Reagan and Bush tax cuts added to the fiscal deficit.

The new Fed chairman, Jerome Powell has a difficult job of unwinding the Fed’s balance sheet by buying less treasuries just as the federal government is issuing more debt to cover the Trump’s tax cuts. Trump will add another trillion dollars to the deficit. More supply of treasuries plus less buyers equals raising interest rates.

Trump blaming Powell for the massive drop in the stock market last week is ridiculous. No one knows for sure what caused investors to hit the sell button. Was it fear of raising interest rates, a forecast of slower global growth by the IMF, fear of an escalating trade war with China or fear of runaway inflation.

My guess is all or none of the above. Maybe the stock market was just due for a correction.

The economic expansion is the second longest in U.S. history, leading many economists to forecast a recession as early as next year. Two-thirds of the economists surveyed by the National Association of Business Economics are predicting a recession by the end of 2020.

Why? Just because things seem to be going so well. The late stage of an economic expansion is most vulnerable to a popping of the bubble. It’s typically when unemployment falls, inflation heats up, the Federal Reserve raises interest rates to cool the economy down, often going too far with investors and consumers pulling back.

Economists are concerned that the yield curve is flattening and could easily become inverted. It hasn’t happen yet, but it is getting very close. An inverted yield curve is when short term rates, the two year yield on Treasury notes are higher then the ten year yield. It signals a lack of faith by investors and has predicted the last 5 recessions. (A recession will occur 12-18 months following an inverted yield curve)

The most likely road to recession is runaway inflation. Falling unemployment and rising wages are a good thing, but eventually higher pay forces companies to raise prices more sharply. That could prompt the Fed to raise rates faster. Higher rates and inflation fears push up other borrowing costs for consumers and businesses, including mortgage rates, curtailing home sales as well as household spending and business investment broadly.

Other triggers that could spark a recession:

Escalating trade conflicts: President Trump has recently slapped 25% tariffs on 16 billion worth of imports from China and China has responded with 25% tariffs on American goods. So far, both China and the U.S. have now imposed tariffs of $50 billion on each other’s goods. The United States has also threatened to slap 25% tariffs on an additional $200 billion of imported goods from China.

Higher energy prices: Oil price spikes have contributed to every recession since World War II by sapping consumer purchasing power, according to Moody’s. U.S. benchmark crude oil prices of about $65 a barrel are up from a low of about $26 in early 2016 and $59 early this year but well below the $112 reached in 2014. And average gasoline prices are just under $3 a gallon compared with more than $4 four years ago.

Budget battles: Early this year, Congress raised budget spending caps by about $300 billion, with most of that devoted to higher defense spending, but that deal expires in late 2019. And the nation’s debt limit must be raised in early 2019. Both issues set up dramatic showdowns in Congress, especially if the midterm elections this year result in a more even split between Democrats and Republicans.

Trouble overseas: The new populist government in Italy has vowed to reverse the country’s austerity measures and give citizens a minimum income. Such measures could revive the country’s debt crisis. They also could pose threats to European banks that hold the debt and spell new risks to the European economy, hurting global stocks and U.S. exports.

Keep in mind that stock markets will decline six months before the start of the next recession. No need to panic yet, but it maybe a good time to review your investment accounts.

Consider taking some profits on some of your more aggressive equity positions

Re-balance your bond holdings to more short term duration from long term

Put any extra cash into high saving accounts

Pay down debt

A recession is when your neighbor loses his job, a depression is when you lose your job.